How to Use Stop-Loss Orders for Stock Trading
The Stock Market is a very volatile entity, where the prices of stocks can change within a single trading session. It is true one can profit hugely from stock investments if he follows the right strategy. Yet, there are chances that one may incur huge losses at times. So, to avoid such unfortunate circumstances, investors or day traders can use certain trading tools. While many people know what is demat account and trading account are, very few are aware of these trading tools. Stop Loss order is a prominent one among them. Let’s find out what is a stop loss and how to use it.
What is a Stop Loss order?
A stop loss order allows you to limit your order price at a specific level. Its main purpose is to cut down losses when the prices of stocks may be slipping down. A trader can enter orders with a predetermined trading position using a stop loss order. The order gets automatically executed if the investment reaches a specific price point. So, one can enter a trade to exit it at a certain point. With the help of a stop loss order, an investor can reduce the risk involved in a trade.
Let’s take an example to develop a better understanding. Suppose a trader decides to buy an asset at Rs 150. He can place a stop loss order of less than Rs 150, say Rs.135, to limit his losses. Hence, he can place the order so that the asset gets sold when the stock price drops to Rs135. So, effectively you will incur a loss of only Rs 15 per share of the stock. As the stock gets sold at Rs135, you will rescue yourself from more losses. This price at which the stop loss order gets activated is the ‘Trigger Price’.
Stop Loss Order Types
There are two kinds of stop loss orders. They are fixed stop loss and trailing stop loss orders. Let’s now understand how these two kinds of stop loss orders work.
Fixed Stop-Loss Orders
A fixed stop loss order allows you to sell a stock at a pre-fixed price. When the stock price hits the price level set by you, the stop loss order comes into effect. One can additionally decide the time of order execution. While placing an order, he can mention the time he wants to execute his order. Such time-based fixed loss orders are helpful if you wish to give your position some time to make profits. The trading strategy assists in sparing enough time for a trade before going ahead with the next one.
Trailing stop loss orders are best to protect the profits made on investment and hedge against sudden price drops. One has to enter a percentage of the total stock price in a fixed stop loss order. The sell order gets triggered if the stock price goes below a particular level. Yet, if the price of an asset increases, the trailing stop loss automatically adjusts itself to this change. It recalibrates according to the current market price of the asset. For instance, if you set a 10% bracket. If the price is Rs. 200, the order automatically gets executed when the asset price goes below Rs 180.
Using Stop Loss Orders
An investor can use a market for both market and limit orders. Let’s discuss each of them, one by one.
Stop Loss for Market Orders
Usually, we do not mention a price while placing market orders. The order execution takes place at the ongoing market prices. You can use a stop loss if you don’t wish to execute a trade at an asset’s current price. You can determine a particular price to execute your order for both buying and selling. If the market price is Rs 215, you can place the stop loss to buy the stock, let’s say, at Rs 190. Similarly, place the stop loss to trigger at a higher price while selling. For example, if you set it at Rs 230, you can make reasonable profits.
Stop Loss Limit Orders
Unlike in market order, we have to specify a particular price in a Limit order. While buying, you can set a price lower than the current one and take profits. In the same way, when you wish to sell a stock at a higher price and get profits out of the trade. Your order automatically gets counted as regular limit orders in both cases.
A stop loss is a very useful trading tool to reduce losses. You can specify the buy and sell actions at predetermined prices of assets. So, traders can balance the risk against rewards. Several trading platforms like IIFL Securities provide tools to place stop-loss orders. The platform is very powerful, with advanced tools. Register on the platform to get access to stop loss orders. Use this handy tool to simultaneously reduce losses and generate profits wherever possible.